Question

In: Economics

Suppose demand for apartments in Honolulu is P=6600-0.5q and supply is P=0.25q. Derive the equilibrium price...

Suppose demand for apartments in Honolulu is P=6600-0.5q and supply is P=0.25q. Derive the equilibrium price and quantity for apartments. Show on a graph. Calculate the producer and consumer surplus. If the city of Honolulu passes a rent control, forcing a rent (or price) ceiling equal to $1800, what is the quantity supplied, quantity demanded, and the shortage? Calculate the new consumer surplus, producer surplus, and deadweight loss, and show these on your graph. If a black market develops after the rent control, allowing landlords to charge an illegal rent, what is the highest rent that they could charge for the quantity supplied of apartments in part b? What is the new producer surplus? Comment on the effectiveness of price controls in allocating apartments to middle to lower income tenants.

Expert Solution

P=6600-0.5Q

P=0.25Q

Demand=Supply

6600-0.5Q=0.25Q

Q*= 6600/0.75

Q*= 8800

P*= 0.25*8800

P*= 2200

Consumer surplus=0.5(6600-2200)(8800)=$19360000

Producer surplus= 0.5(2200)(8800)=$9680000

When Price= $1800

Quantity demanded= 10000

Quantity Supplied= 6400

Shortage=10000-6400= 3600

New consumer surplus=0.5(6600-3400)*6400=$10240000

New Producer surplus=0.5(6400)(1600)= $5120000

Deadweight loss= 0.5(3400-1600)(8800-6400)= $2160000

After Black market, Highest rent=$3400

New producer surplus= (3400-1600)(6400)+0.5(6400)(1600)= $1152000+$5120000=$6272000

Rent control will lead to shortage of apartments, this will lead to difficulty for middle and lower income group families to find apartments.

Rahul Sunny answered 2 years ago

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